Spain About to Whack Hapless Smaller Savers Conned into Buying Bank Preference Shares as a Condition of its Bank Rescue

Yves here. We’ve flagged in earlier posts how the Spanish banking crisis had the potential to become destabilizing politically, as if Spain wasn’t already at considerable risk of upheaval. Spanish depositors were pushed to convert their deposits into preference shares, which they were told were just as safe. That of course was never true.

This was a simple desperation move by the banks to save their own skins, customers be damned, by raising equity from the most unsophisticated source to which they had access. And now that that gambit failed, these shareholders are due to have those investments wiped out unless the Spanish authorities can cut a deal to spare them. The conditions of a bank rescue, which Spain did try to resist, was to have equity holders wiped out, or at least haircut. And that plan is now about to be set in motion. Having losses imposed on small savers who were in many cases conned by their own bank to buy these preference shares is going to do serious harm as well as further delegitimate the government.

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Back in July this year I mentioned that the new Memorandum of Understanding for the bailout of the Spanish banking system was going to include a special purpose vehicle (a “bad bank”) which would allow the banking system to offload non-performing assets. In October I posted on the structure of that bank, which would be called “Sareb”, and exactly how assets would be transferred.

As I mentioned in that July post, one of the critical points about the Spanish banking system is that Spanish banks had been successful in persuading ordinary citizens to switch their deposits into preferred shared and hybrid securities which, in the case of the enactment of the MoU, would force them to be “bailed-in”.

Overnight the European Commission approved the enactment of the MoU which have indeed triggered substantial bail-ins for Spain’s citizens. On top, Spanish banks will be forced to shrink, shed thousands of jobs and restructure their balance sheets over the coming years:

Four failed Spanish banks including the nationalised giant Bankia have been rescued by the eurozone’s bailout fund in exchange for brutal cuts to their workforces, branch networks and balance sheets as tens of thousands of small retail bondholders were also hammered.

Bankia, Catalunya Banc, Novagalicia and Banco de Valencia were set to shed more than 10,000 jobs in return for receiving €37bn (£29.9bn) to clean out toxic real estate assets that will be transferred to a Spanish “bad” bank.

The news came on the heels of OECD forecasts that see unemployment rising above 6 million people next year as the recession-hit country continues to slash government spending, with a jobless rate set to reach 27%.

The harsh conditions imposed by Brussels will force the former savings banks to return to their origins and concentrate on looking after the money of small businesses and families after a decade in which they grew fat on the back of a residential housing boom that left them badly exposed when the bubble burst.

The banks must shrink their balance sheets by 60% over five years and immediately sell off €45bn of real estate assets to the Sareb bad bank at average discounts above 50%.

FT reports that holders of Bankia’s preferred shares will see a write-down of 39%, perpetual subordinated debt 46% and subordinated debt 14% and the total bail-in is expected to reach €10bn. As you can see from the article the banking system has been granted €37bn in order to support the restructure of Group 1 banks but there is more to come.

As of June 2012 there were already €170bn of bad and doubtful debts in the Spanish banking system and this figure has risen since as every month the percentage of bad debts sets a new record and the trend is accelerating. Bankia itself forecasts a €19bn loss this year.

Although ultimately the restructure of the banking system is a positive step, the political fallout from this event is definitely something to keep your eye on. Not only have Spanish citizens now lost billions in savings, but the shrinking of the banking system will lead to tens of thousands of well paid jobs going. In an economy already suffering 25% unemployment this is a potential political firecracker especially given the €37bn will be added to the Spanish national debt which is again something Spanish citizens will have to deal with. Something I noted back in July.

In other Eurozone banking news, the ECB released the October report on monetary developments overnight. The news wasn’t all bad with a possible bottoming of private sector credit growth, although it is difficult to see this as anything more than a brief up-tick given other data:

On a yearly basis the news is less positive with the divergent trend between government and private sector lending we have seen in previous reports continuing and private sector lending weakening further:

The annual growth rate of credit extended to general government increased to 8.8% in October, from 8.2% in September, while the annual growth rate of credit extended to the private sector was more negative at -1.4% in October, from -1.2% in the previous month. Among the components of credit to the private sector, the annual growth rate of loans was less negative at -0.7% in October, from -0.9% in the previous month (adjusted for loan sales and securitisation2, the rate stood at -0.4%, unchanged from the previous month). The annual growth rate of loans to households increased to 0.5% in October, from 0.1% in September (adjusted for loan sales and securitisation, the rate stood at 0.8%, unchanged from the previous month). The annual growth rate of lending for house purchase, the most important component of household loans, increased to 1.3% in October, from 0.7% in the previous month. The annual growth rate of loans to non-financial corporations was more negative at -1.8% in October, from -1.5% in the previous month (adjusted for loan sales and securitisation, the rate was more negative at -1.5% in October, from -1.2% in the previous month). Finally, the annual growth rate of loans to non-monetary financial intermediaries (excluding insurance corporations and pension funds) stood at -1.9% in October, compared with -2.0% in the previous month.

This data is leading to an increased spread between M3 growth and private sector credit growth as seen in the chart below:

Full report below.

Monetary Developments in the Euro Area- October 2012

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  1. The Dork of Cork.

    There can be little doubt that both Irish & Spanish societies have been deeply compromised by the social dislocation experiment that was the Spains entry and Irelands experience after the Single European act.

    There is and has been a very high tempo continuous psychological war on these groups since the very start using credit opium as the drug of choice.

    Now that the cohesion of these Societies is fully compromised the Euro soviets can move in with the solution.

    A full banking union will mean these satanic forces will have full access to fiat farming without any nation state political complications.

    This is the end of Europe as a diverse continent of peoples – something which made it great in the past.

    They want another bland market state.
    A USA 2.0.
    It looks like their neutron bomb tactics is working.

    1. From Mexico

      I am no great fan of nationalism, nor the ideologies formulated to give nation-states moral and intellectual legitimacy. I consider nationalist ideologies to be based on nothing but mythology, and to be just another form of racism or tribalism.

      But, one must ask, “Is nationalism a necessary evil?” This certainly is the question the essay by Ljubiša Mitrović (see below) raises, and a point Hannah Arendt made clarion in The Origins of Totalitariansim:

      The Rights of Man, after all, had been defined as “inalienable” because they were supposed to be independent of all governments; but it turned out that the moment human beings lacked their own government and had to fall back upon their minimum rights, no authority was left to protect them and no institution was willing to guarantee them.

      It seems like nationalism always arises as a compensatory response to a supranational authority which has grown decadent and corrupt. This certainly was the case in Germany and the Low Countries in the 16th and 17th centuries when the Church—-a supranational authority of the time—-fell victim to a succession of disastrous popes.

      Egidio of Viterbo, general of the Augustinians, summed up Pope Alexander’s Rome in nine words: “No law, no divinity; Gold, force, and Venus rule.” Guicciardini wrote: “Reverence for the Papacy has been utterly lost in the hearts of men.” In 1513 Machiavelli charged that there could be no greater proof of papal decadence than the fact that the nearer people are to the Roman Church, the head of their religion, the less religous they are. And whoever examines the principles on which that religion is founded, and sees how widely different from those principles its present practice and application are, will judge that her ruin or chastisement is near at hand. Luther, aware that the Pope was spending fortunes on Vatican art as famine stalked Europe, wrote that if the pope could see the poverty of the German people, “he would rather see St. Peter’s lying in ashes than that it should be built out of the blood and hide of his sheep.“ The dissident artist Hieronymus Bosch (1450-1516) revealed the avaricousness of monks, sins of nuns, and licentiousness of father confessors with his pictures.

      The humanist debate about national identity, Jonathan I. Israel notes in The Dutch Republic, became something of an undercurrent to the wider encounter about theology and scholoraship. It was with humanists like Ulrich von Hutten that the preoccupation with national identity began to arise, such as when he wrote:

      While our forefathers—-the Goths and the Huns—-thought it unworthy of them to submit to the Romans when Rome was the most martial nation in the world, we not only submit to these effiminate slaves of lust and luxury, but suffer ourselves to be plundered to minister to their sensuality.

      Prominent humanists like von Hutten, Aurelius and Geldenhauer gave birth to the Batavian myth. As Israel goes on to explain:

      This myth, the alluring notion that the ancient Bavarians described in Tacitus—-heroic, virtuous, and freedom-loving, who, under thier leader, Claudius Civilis, had successfully revolted against the Romans—-had lived in the north Netherlands, or part of it, had arisen assuming important political and cultural undertones in Dutch humanist circles in the years around 1500.

      From the outset the Batavian myth was a potent factor in building a new, broader sense of patriotic identification with Holland as a political, moral, and cultural entity, as patria and ‘nation‘—-words employed by Aurelius—-and for this reason later became an integral part of Dutch cultural identity during the Revolt and Golden Age.

      Germany and the Low Countries, after the ascenscion of Carlos V to Holy Roman Emperor in 1519, also suffered under another highly corrupt and decadent supranational authority, that of the Holy Roman Emperor. Maximillian, Carlos V’s predecessor, sensing that anticlerical sentiment was increasing throughout Germany and the Low Countries, supported the revolt against the Church. “Take good care of that monk,“ he wrote Frederick the Wise in regards to Luther, only six months before the Emperor‘s death. The emperor summoned the imperial diet to Augsberg in response to a request from Rome. Pope Leo had told him he was planning a new crusade against the Turks and wanted a surtax to support it. The diet rejected the appeal. Frederick, after collecting a papal levy from his people, had decided to keep it and build the University of Wittenberg. All previous crusades had failed anyway. And the German princes weren’t worried about Turks. The real enemy of Christendom, they decided, was what one of them called “the hell-hound in Rome.“

      When the Spanish King, Carlos I, became emperor of the Holy Roman Empire (as Carlos V), all that changed. Putting Spain and the Holy Roman Empire at the head of the mission against the infidel and the Islamic threat, and assuming the role of defender of the Church and the faith, he greatly increased the economic burden levied upon Germany and the Low Countries. Israel explains the ingenious form of war finance Carlos‘ ministers devised, which worked beautifully, at least for a while:

      The Brussels regime achieved a major breakthrough by inducing the provincial States to adopt the method (which in the past individual cities had experimented with) of issuing interest-bearing annuities, or bonds known as renten.

      By means of these interest-yielding renten, issued to the public, large sums could be raised with which to fund the central government’s military expenditure by provincial States which had the local connections, and status, to inspire confidence that the interest on the annuities would be regularly paid… States of Holland renten were often purchased as family investments by officials and especially civic magistrates and regents in Holland itself.

      To begin with, the new province-based system of funding the government’s war expenses proved an efficient means of coping with the burden, and mitigating the disastrous effect of rising fiscal pressure. But as the years passed, and there was no let up in the government’s demands, it became apparent that the Emperor was routinely using the Netherlands as his chief strategic bulwark and resource, in pursuit of goals which were vital to him but had little to do with the Netherlands…

      Different provinces responded to the financial crisis in different ways. Many simply knuckled under and issued unprecedented quantities of interest-bearing bonds. By exploiting this avenue to the limit, some provincial and town governments paid for a period of continued tranquility at the price of severe financial dislocation later. Until 1562 Lille, for example, was able to keep up interest payments on the huge quantity of bonds issued by the city in the 1550s, but then found itself in chronic financial difficulty. As long as the system functioned smoothly, the most affluent sections of society were happy enough to co-operate with Brussels. The public were paying the interest on the annuities, through indirect taxation, so that the bonds themselves proved increasingly attractive as an investment among the rich and influential.

      By 1556 the economic burden had become unbearable, and the States General balked when Philip II (Carlos’ successor) put his first package of financial demands to them. The Crown’s financial exigency was now such that the king demanded the unheard of sum of 3 million guilders to be raised. The provinces, headed by Brabant, refused. Philip sent Don Fernando Alvarez de Toledo, third duke of Alva, to quell any insurrection. Alva established the notorious Conseil de Troubles and many speculate that his tactics were portrayed in Bruegel’s masterpiece, Masacre of the Innocents:,_Pieter_-_Massacre_of_the_Innocents_(1565-7).JPG

      “Why talk about 1,700 put to death, many of them vile animals such as the Anabaptists,“ Philip was to write, defending Alva’s inquistorial procedures, “and not write about the thousands who would die in the Netherlands if they succeeded in translplanting the Huguenot wars there as they wish to do!“

      1. The Dork of Cork.

        Sure I agree ,
        I tend to look at these events from a different circles of hell perspective anyway as I believe the nation state was a banking concept so as to play one political unit off against another.

        Wether it was ever a nation or not – the market state experiment in Ireland especially after 1986 has meant the entire society is now atomised units of consumption that now cannot even consume so they have been made more aware of the emptyiness of their lives (which could be a good development)

        Cork was always a heavily masonized city keeping the mythology of the place intact but now its as if a neutron bomb as gone off with the buildings remaining but much of the people gone or extremely detached from events.

        This is a planned take down of former nations so as to make the extraction of the marrow from the bones somehow easier.

        This extraction they called “growth”
        Now all redundancy is gone the pillage can commence in open view.

        1. jake chase

          It has always seemed to me that adoption of the Euro was inviting Nazis in through the back door. America did a similar thing with the Federal Reserve Act and the Income Tax. What each of these faux progressive iniatives accomplished was to move political control progressively further from local and regional authority. Ultimately, faceless unelected multinational bankers and executives assume political control, local authority is subsumed under an avalanche of debt. You get conquest without shooting, painless up to the point of suffocation, euphoric until the bill comes due, a sort of political carbon minoxide poisoning. Still to come, concentration camps for debtors. Perhaps they will be manning call centers?

          1. craazyman

            it’s always a contest between insanity structures.

            lately I’ve been wasting time surfing the internet reading about civil war battles in northern virginia, where I grew up. Manassas 1 and 2 (Bull Run), Balls Bluff, Chantilly, Mosby’s Raiders, etc. the fortifications and skirmishes around Washington, etc. Looking at the photographs to see if I can see hints of today’s geography and the places I recognize in them. It can be quite startling.

            Certainly the notion of regional authority vs. federal authority was a primary point of conflict.

            Grant’s observation at Appomatox on taking Lee’s surrender, that the confederates fought bravely and he (Grant) was (I forgot the word, not “sorry” but something like empathetic and respectful, etc. of their humanity) — but he also said no army had likely ever fought for a worse cause. Perhaps his opinion would have changed if he’d seen Nazi Germany.

            it’s like that. I recall reading about the New England Indian tribes, some of which congregated loosely around tribal shaman leaders. Sometimes the leader would go crazy and start murdering people. Then the group would dissolve and the remnants would find another “leader” who was hopefully not insane. In some cultures, the murder would get ritualized into a mythic structure, in many cultures actually.

            The social organization over history repeatedly reaches out into wider forms of abstraction — like religions with their evangelical fervors — to constrain the local outbreaks of insanity. Obviously, there is an element of this to the euro, to constrain the outbreaks of war that marred the centuries in Europe.

            But things become their opposites and the ‘bad seed’ takes hold in the wider structure and corrupts it by negating it’s original premise. This is so common as to be cliche. In my view, money arose as a social creation in part in reaction to this propensity, since it’s a form of force/protection/validity as a metaphor for the life force and it can defend the possessor against many of the carnivorous (a very precise word I’m using there) elements in the group consciousness formation. I have connected all the dots riding the bus and understand most of this now, but it doesn’t mean anything. It’s like understanding the weather but you still get rained on.

          2. craazyman

            also I can’t believe the site ate my Star Trek parody comment.

            I never edit or save anythibg i write here so if it goes it goes. whatever.

            still, it cracked me up and it was right on topic, right on! and it’s dissapointing not to have the chance to crack up again seeing it in “print”.

          3. jake chase


            We are relentlessly instructed to believe in the rightness of the American system, its representative democracy, its federal system, its benign influence on other countries, its support for underdogs, its meritocratic economic system, its traditional moral virtues, its respect for law. I could go on and on and on (and our politicians and network comedians and schoolteachers and corporate poobahs continuously do). I wish one of them would explain why things are so completely f*****d up. Surely, it cannot all be do to a pervasive sense of entitlement among an indolent underclass? Sometimes I think only George Carlin understood what was really going on.

          4. rotter

            Democracy becomes more imnpossible as a culture become “less homogenous” . The EU is a monstronsity.

            (dont conflate culture with ethnicity either)

  2. The Dork of Cork.

    This Leaked ? commission report on Greece is interesting.

    This document raises much deeper questions.

    The objective seems to be a massive socio – economic change not unlike the cromwellian ranch experiment in Ireland & the later final hanoverian displacement in western scotland.

    Namely to drive the peripheral area into a form of extreme energy surplus that can continue to feed the cold dead heart of the core even if it means massive losses of productivity.

    The implications of this is profound.
    With the final destruction of the nation state after the single European act of 1986 these areas have become rich areas of extraction for the financial capitals and the former nations that give them sucker.

    The similarity with the formation of the early UK in the 1700s is striking , with favoured nation status granted to England and other minor areas such as Dublin & Edinburgh while the remaining areas feed these cities which must always remain in real goods deficit.

    The plan is now finally becoming very easy to read.

    In Box 3 they look at car stuff (capital consumption goods)
    The current account with and without the oil bill and interest etc etc

    But the objectives are dark
    They wish to force the country to export at all costs rather then sustain a domestic economy.
    They obviously wish to crush all internal commerce as this will subtract from their clients rental income.
    I feel the EEC from the very start had this as its core objective.
    As slowly over time nation states stopped using their own hinterland for funds (and in the case of semi independent Ireland the Sterling system of integration) and have sent their rations towards the core financial centers , now hoping for some Gruel in return.

    These past 400 + years have not been about “growth” but a concentration of power first in the lowlands as they sucked in resources from as far as the new world and finally the age of oil.

    The privatisation plan appears to be infact a success as the objective is to sell at a low price and not a high price.

    The language in the assessment of compliance section seems to be from a Nazi era (but really we have never left it )
    The government adopts
    The government will define
    The government must
    The Government ?

    Reduced overtime for doctors will surely kill a fair few Greeks as they are running out of doctors anyway.

    This is clearly Basel III dictatorship where the banks stop giving credit yet expect the (puppet) governments not to print.
    Given the BISs dubious beginnings who could expect anything less ?

    The liberalisation of the countries natural monopolies is interesting (“under growth enhancing reforms”)
    This is the blueprint for the modern market state.

    The logic of this is hard to escape.
    This is full on enemy action
    People who aid the enemy are the enemy.

    Most liberals fails to recognize this goes far beyond ” policy mistakes”
    This is the modern market nazi era.
    Taxation & private rent seeking without representation.
    A total deliberate & systematic collapse of the entire political contract.

  3. From Mexico

    Make no mistake about it, Spain’s president Mariano Rajoy Brey, who became president in November 2011, is the latest in a long line of traitors to the vast majority of Spanish people.

    He hails from what Ljubiša Mitrović calls the “comprador bourgeoisie.”

    Comprador bourgeoisie is the upper layer of the bourgeois class…. It is not national in character and is socially irresponsible. It is a blind servant of foreign capital, ruthless in the exploitation of the domestic workforce and dictatorial in relation to its fellow countrymen. Its homeland is where its interests are. It is the agent of the megacapital in the function of global economy. It is a “Trojan horse” of the foreign TNCs [Transnational Corporations]… Its god is the god Mammon, the capital. Its aim is to amass capital, and it puts profit above individuals. It is a predatory class of the nouveau riche and often bon vivant and parasitic upstarts. It is a peculiar jet-set of bandit economy…..

    If they wish not to be discarded by the citizens and most of the nation, political parties and elites would have to stop deceiving the citizens and articulate their real interests in the struggle for social change.


  4. The Dork of Cork.

    Give me a fiat king over this sham rep democracy.

    At least in the past we had a sporting chance to identify the chain of command.

    Heads could be chopped off and stuff.

    Chomsky (50.40) makes some great points which rings through today about what was happening in 17th century England.

    The supporters of the King were Jacobite like bunch of free masons while the other side was a northern European capitalist cartel (Venetian banks)

  5. Lyle

    But how is this different that what Charles Keating did during the S&L scandal. The best lesson is to teach folks to just say no, and that things with a higher yield than bank deposits come with more risk. Further teach folks that financial salestypes never ever have your interest at heart. Once again caveat emptor proves true. Since it takes two to tango, if folks just said no, to a whole lot of things, rather that think they can make a killing in the market the scamsters would fade away.

  6. Ignacio

    Fired, fired, fired, you are fired.
    This is the only stupid solution coming from the Masters of the eurouniverse. F%ck the UE!!. Ruled by people that do not respond to those affected by their f&cking measures they devise. Obsessed by “competitivity” which in turn is confused with consumption. Nothing gets competitive by firing and reducing salaries. It just shrinks the companies, the society, consumption, the ability to invest, the share of spanish products in global markets, and the ability to repay debts.

    I am really fed up with this shit.

    1. Lyle

      In particular Lincoln Savings (Charles Keating) sold junk bonds from ACC corp to unsuspecting folks who visited the S&L convincing them (as flim flam types do) that the junk bonds were as safe as FSLIC insured deposits, and gave better rates. These folks needed to learn the message of just saying no, as the folks in spain do. The number of times this happens suggest that the flim flam types know how to take advantage of the gullible. Perhaps we need to teach folks financial paranoia, that everyone wants your money and is out to get it.

    1. ambrit

      Dear Bam_Man;
      I don’t know, but Google “politico” for a good view of the other end of the spectrum. Way Down South, as in below the border with Mexico, ‘Politico’ is often viewed as a real insult.

    2. rotter

      You mean the Jim Henson things? Does it mean something else? If so what is the English language meaning seems to be one of those internet words that only has some secret meaning to its user, but one they expect everyone else to know without being told

  7. JGordon

    I am having less and less sympathy for those dumb enough to believe the lies put out by the corporate state media. Those who are too trusting and have their heads stuck in the sand, for whatever reason, will simply have some very unpeasant things happen to them. If they are lucky, someone around them who cares about them will have some awareness of reality. And if not, well. Sucks to be them. For a preview, look at what’s happening to those wilfully ignorant and deluded souls who purposefully chose not to prepare ahead of time are still dealing with the aftermath of hurricane Sandy. I’d dare say that those folks now have a new perspective on what reality is like. And has nothing to do with prefferred equity shares of local criminal banking syndicates.

    By the way, anyone who has their “wealth” stored in paper rather than say ammo, solar panels and rabbits (and silver and gold if that strikes your fancy–although it’s important to note that during the crisis people will be willing to trade a pile of gold for a loaf of bread–at least until things get reorganized) is in that delusional group who believe corporate state lies.

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